Ramkrishna Forgings Ltd

Transcription

Initiating coverage
Enhancing investment decisions
Explanation of CRISIL Fundamental and Valuation (CFV) matrix
The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process –
Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental
grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The
valuation grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market price (CMP)) to
grade 1 (strong downside from the CMP).
CRISIL
Fundamental Grade
Assessment
CRISIL
Valuation Grade
Assessment
5/5
Excellent fundamentals
5/5
Strong upside (>25% from CMP)
4/5
Superior fundamentals
4/5
Upside (10-25% from CMP)
3/5
Good fundamentals
3/5
Align (+-10% from CMP)
2/5
Moderate fundamentals
2/5
Downside (negative 10-25% from CMP)
1/5
Poor fundamentals
1/5
Strong downside (<-25% from CMP)
Analyst Disclosure
Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest
that can bias the grading recommendation of the company.
Disclaimer:
This Company -commissioned Report (Report) is based on data publicly available or from sources considered reliable. CRISIL Ltd.
(CRISIL) does not represent that it is accurate or complete and hence, it should not be relied upon as such. The data / Report are
subject to change without any prior notice. Opinions expressed herein are our current opinions as on the date of this Report. Nothing
in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The subscriber / user assumes
the entire risk of any use made of this data / Report. CRISIL especially states that it has no financial liability, whatsoever, to the
subscribers / users of this Report. This Report is for the personal information only of the authorized recipient in India only. This
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outside India or published or copied in whole or in part, for any purpose.
December 31, 2010
Polaris Software Limited
Ramkrishna
Business momentum Forgings
remains intact Ltd
Fair Value Rs 155
CMP
Rs 112
CFV MATRIX
Rings of rolling profitability
3/5
fundamentals)
4/5 (Good
(Strong
fundamentals)
Valuation Grade
5/5 (CMP has strong upside)
Industry
Auto Components
Information
technology
Excellent
Fundamentals
Kolkata-based Ramkrishna Forgings Ltd (RKFL) primarily manufactures
precision engineering components for automobile, railways and other sectors.
CRISIL Equities expects the company to benefit from the expected growth in
the automobile sector, which contributes ~84% to RKFL’s revenues. We assign
RKFL a fundamental grade of ‘3/5’, indicating that its fundamentals are ‘good’
relative to other listed securities in India.
MHCVs to drive operating level of forging unit
5
Fundamental Grade
Fundamental Grade
4
3
2
1
1
Poor
Fundamentals
2
3
4
5
Valuation Grade
KEY STOCK STATISTICS
Export demand to fuel ring rolling volumes
NIFTY\SENSEX
6102/20389
NSE\BSE ticker
RKFORGE
RKFL is witnessing increasing demand for crown wheels produced from rolling
line due to their superior precision quality and lower cost of production. The
company has already done trials for major players in Europe and the USA with
positive response. We expect the division to log strong growth with utilisation
rate doubling to 82% in FY12 from 40% in FY10.
Strong bargaining power of OEMs in a commoditised, cyclical segment
Original equipment manufacturers (OEMs) have a strong bargaining
their suppliers and are known to squeeze them. This is expected to
the short term as the demand for auto components is increasing
pace than supply. Further, RKFL’s high dependence on the
industry, which accounts for close to 84% of revenues, exposes it
in economic cycles and interest rates.
power with
taper off in
at a faster
automobile
to changes
Expect two-year revenue CAGR of 24%
We expect revenues to register a two-year CAGR of 24% to Rs 4.4 bn in FY12
driven by growth in volumes and realisation. EBITDA margin is expected to
expand to 18.3% in FY12 owing to increasing share of export sales and an
increase in capacity utilisation rate. PAT is expected to increase at a two-year
CAGR of 62% to Rs 287 mn.
Valuations – the current price has ‘strong upside’
Strong
Upside
10
Shares outstanding (mn)
16.4
Market cap (Rs mn)/(US$ mn)
1,840/40
Enterprise value (Rs mn)/(US$ mn)
3,717/85
52-week range (Rs) (H/L)
185/92
Beta
0.95
Free float (%)
49.0%
Avg daily volumes (30-days)
1,984
Avg daily value (30-days) (Rs mn)
0.28
SHAREHOLDING PATTERN
100%
90%
22%
21%
24%
24%
2%
1%
52%
54%
Sep-09
Dec-09
25%
25%
26%
22%
22%
22%
2%
2%
1%
51%
51%
51%
80%
70%
60%
50%
40%
30%
10%
0%
Promoter
FII
Mar-10
Jun-10
DII
Sep-10
Others
PERFORMANCE VIS-À-VIS MARKET
KEY FORECAST
(Rs mn)
FY08
FY09
FY10
FY11E
FY12E
Operating income
2,009
2,295
2,858
3,772
4,416
EBITDA
393
401
467
665
809
Adj Net income
130
41
114
201
287
EPS-Rs
8.5
2.7
6.9
12.2
14.1
EPS growth (%)
(7.3)
(68.3)
158.7
76.7
15.5
P/E (x)
13.2
41.8
16.2
9.2
7.9
1.9
1.8
1.5
1.3
1.2
RoCE (%)
15.2
10.9
11.1
14.1
16.0
RoE (%)
16.0
4.4
10.3
14.9
16.9
8.2
8.8
8.0
5.7
4.8
EV/EBITDA (x)
Face value (Rs per share)
20%
CRISIL Equities has used the price-to-earnings ratio (PER) method to value
RKFL because of the cyclical nature of the industry. We have assigned a PER of
11x to RKFL’s FY12 EPS of Rs 14.1 and arrived at fair value of Rs 155 per
share. We initiate coverage on the company with a valuation grade of ‘5/5’.
P/BV (x)
Strong
Downside
RKFL supplies auto components to the medium and heavy commercial vehicles
(MHCV) sector, which is growing full throttle keyed by sustained expansion in
economic activity, rising consumption expenditure and availability of vehicle
finance. CRISIL Research expects the MHCV sector to grow at a CAGR of 1214% during FY10-15. Consequently, the utilisation rate of RKFL’s forging and
machining unit is expected to increase to 89% in FY12 from 78% in FY10.
Sou rc e: Com pan y, CR I SIL Equ it ies est im ate
Returns
RKFORGE
NIFTY
1-m
-10%
4%
3-m
-31%
1%
6-m
-6%
15%
12-m
19%
18%
ANALYTICAL CONTACT
Chetan Majithia (Head)
[email protected]
Rishi Gupta
[email protected]
Vishal Rampuria
[email protected]
Client servicing desk
+91 22 3342 3561
[email protected]
NM: Not meaningful; CMP: Current Market Price
CRISIL EQUITIES | 1
Table: 1 Ramkrishna Forgings Ltd: Business environment
Product / Segment
Revenue contribution (FY10)
Forging
Ring rolling
Forging is the shaping of metal using
Ring rolling is a type of forging
localised compressive forces
~31%
~69%
(Domestic – 98%, exports – 2%)
Revenue contribution (FY12)
~55%
~45%
Product / service offering
Parts
for
transmission
and
axles
of
Crown wheels
commercial vehicles, critical safety items
for railways
Geographic presence
Manufacturing facility: Jamshedpur and
Manufacturing facility: Jamshedpur, India
Howrah, India
Industry growth expectations
•
Robust growth in MHCV’s goods segment at 13-15% of CAGR and in the passenger
segment at a CAGR of 8-10% between 2009-10 and 2014-15
•
Rebound in global automotive sales to boost Indian exports
Sales growth
(FY08-FY10 – 2-yr CAGR)
Sales forecast
(FY10-FY12 – 2-yr CAGR)
Demand drivers
7.15%
73.60%
11.53%
48.41%
•
Strong growth in the MHCV industry
•
India positioned as low-cost auto hub
•
High demand for crown wheels produced from automated ring rolling in the
international market because of lower cost of production and superior precision
quality
Key competitors
MM Forgings, Ahmednagar Forgings, and Mahindra Forgings
Key risks
•
Revenue concentration ~48% towards single customer, Tata Motors
•
High dependence on the automobile industry, which is highly susceptible to economic
•
Currency risk on export revenues
cycles
Sou rc e: Com pan y, CR I SIL Equ it ies
CRISIL EQUITIES | 2
Grading Rationale
Growth in MHCV sector to drive RKFL’s forging unit
RKFL supplies auto components to OEMs of MHCVs. The MHCV sector, which
consists of goods and passenger segments, is growing full throttle keyed by
sustained expansion in economic activity, rising consumption expenditure and
availability of vehicle finance. CRISIL Research expects the goods segment of
the MHCV sector to grow at a CAGR of 13-15% between 2009-10 and 2014-15
and the passenger segment to grow at a CAGR of 8-10% over the same period.
Figure 1: MHCV goods sales to grow at 14% CAGR
Figure 2: Passenger segment to grow at 9% CAGR
('000)
('000)
100
600
90
500
80
70
400
60
50
300
247
20
10
0
29
39
35
43
58
62
FY15E
201
54
67
50
FY14E
149
30
FY13E
236
347
FY12E
246
310
MHCV Goods segment - Unit sales
Source: CRISIL Research
FY10
FY09
FY07
FY15E
FY14E
FY13E
FY12E
FY11E
FY10
FY09
FY08
FY07
0
FY08
100
276
388
FY11E
40
200
MHCV Passenger segment - Unit sales
Source: CRISIL Research
Utilisation levels of forging and machining to
increase
With the revival in domestic auto sales, we believe the demand for various auto
Higher operating rates to
components manufactured by RKFL – such as gears, axels and crown wheels -
increase profitability
will increase significantly. Historically, the company’s utilisation rate has been
linked to the sales of MHCVs. RKFL’s capacity utilisation for forging declined to
~54% in FY09 from 71% in FY08 as MHCV sales volume decreased by 33%.
With the expected high growth in MHCV sales and no announcements of
capacity addition by major forging players, the utilisation for RKFL’s forging
plant is bound to go up. Higher operating rates will help the company increase
its profitability.
CRISIL EQUITIES | 3
Figure 3: Plant utilisation level to increase
(MT)
35,000
30,000
71%
54%
25,000
87%
89%
29,667
30,349
100%
78%
80%
60%
26,487
24,321
40%
20,000
18,526
15,000
32.7%
20%
21.4%
10,000
11.2%
0%
-0.3%
-32.8%
5,000
-20%
-40%
0
FY08
Production (MT)
FY09
FY10
Utilisation (RHS)
FY11E
FY12E
% change in MHCV Volume (RHS)
Source: Company, CRISIL Equities, CRISIL Research
Low-cost structure positions India as an auto hub
During the past one decade, India’s auto component exports have grown
manifold. Although, the share of exports as a percentage of the total domestic
auto component industry has doubled from 8% in FY00 to 16% in FY09, the
country’s share in the global auto component export market is less than 1%.
Share of exports doubled to
16% in FY09 for the Indian
auto component industry
India is well positioned in the global auto industry because: a) labour costs are
low, b) it is a potential global hub for research and development (R&D), and c)
its capability to manufacture components in adherence with the stringent
quality standards of international OEMs. In recent times, a lot of interest has
been shown by global auto majors to promote Indian suppliers in the global
auto value chain.
Indian manufacturers are also moving up the value chain in the auto
component industry – in FY09, close to 80% of auto component exports went
directly to OEMs compared to about 35% in FY2000. CRISIL Research expects
the export market to grow at a 20% CAGR until 2014-15 to Rs 369 bn in 2015.
Exports to perk up utilisation level of ring rolling
In FY07, RKFL installed a completely automated 24,000 MT ring rolling unit at a
capex of Rs 620 mn to cater to the export market of crown wheels. Operational
issues surfaced in the first year. The plant got stabilised in FY08 but due to the
Utilisation level to increase
global auto industry slowdown, RKFL could not harness growth from the ring
to 82% in FY12 from 40%
rolling plant. With the recovery in global auto production and an increasing
in FY10
emphasis on the component sourcing strategy of global OEMs, exports demand
is showing signs of improvement. The crown wheels produced from the
automated ring-rolling line have high demand in the international market
because of lower cost of production and superior precision quality.
CRISIL EQUITIES | 4
Figure 4: Utilisation level of ring rolling to increase
(MT)
22,500
82%
20,000
80%
63%
17,500
70%
15,000
60%
12,500
50%
40%
10,000
7,500
19,680
24%
40%
30%
15,120
5,000
2,500
90%
20%
9,700
5,643
10%
0
0%
FY09
FY10
FY11E
FY12E
Production (MT)
Utilisation (RHS)
Source: Company, CRISIL Equities
With the revival in global auto sales, we believe the demand for crown wheels an essential component of the automobile differential - to increase and RKFL is
Adding new customers in
well placed to capture this growth. RKFL has tied up with Arvin Meritor, a global
the export market to
provider of automotive systems, for the supply of crown wheels to its plants in
harness growth
Brazil and Italy. The company has already received firm orders from Sypris
Industries of the US which will help it enter the US market and it is in talks with
other international players including EGE in Egypt to expand its global customer
base. Expected increase in the export of crown wheels will likely expand
margins on account of export incentives.
Figure 5: Higher contribution from exports to expand margins
(Rs mn)
1,000
900
52
19.6%
17.5%
800
16.4%
17.6%
700
600
11.4%
500
6.6%
400
300
200
100
12.3%
10.9%
23.2%
18.3%
26%
21%
16%
11%
24
6%
12
12
10
1%
193
204
160
395
870
FY08
FY09
FY10
FY11E
FY12E
-4%
0
Export sales
DEPB Incentive (6%)
Exports as % of total (RHS)
EBIDTA Margins (RHS)
With increasing order flow, RKFL is now focusing on getting orders of higherweight products, which helps in increasing the manufacturing capacity on a
tonnage basis. As the cycle time to produce one unit does not increase
proportionally with an increase in tonnage of the product, higher average
Concentration on heavier
products to increase
production capacity
weight of the job increases the capacity of a forging facility. This will help the
company maximise production of its ring rolling plant, thus improving the
return on capital employed.
CRISIL EQUITIES | 5
A key cog in Tata Motors’ supply chain wheel
RKFL has become an integral part of Tata Motors’ supply chain. It generated
close to 48% of FY10 revenues from sales to Tata Motors. RKFL supplies various
Tata Motors contributed
forged/machined automotive parts to Tata Motors and in certain products -
48% of net sales in FY10
including crown wheel, saddle bracket, ring gear and front wheel hub - it enjoys
~70-100% share in Tata Motors’ total component purchase for commercial
vehicles.
Figure 6: Increasing share of sales to Tata Motors
1,400
60%
1,200
48%
41%
1,000
50%
40%
38%
40%
800
30%
1,238
600
400
200
20%
800
744
505
10%
0
0%
FY07
FY08
FY09
Sales to Tata Motors
FY10
Sales to Tata Motors as % of net sales (RHS)
During the global downturn (FY08 and FY09), RKFL increased the number of
Even though Tata Motor’s
products and made a conscious effort to enhance product value by adding new
sales volume of MHCV
machines in the machining centre. This has been a key in increasing RKFL’s
decreased by 31% in FY09,
share of Tata Motors’ auto component purchase. Even though Tata Motors’
RKFL’s sales to Tata Motors
sales volume of MHCVs decreased by 31% in FY09, RKFL’s sales to Tata Motors
increased by 8%
increased by 8%.
Figure 7: New products boosted sales to Tata Motors in
downturn
140%
124%
120%
100%
80%
40%
55%
47%
60%
35%
35%
8%
20%
-4%
0%
-31%
-20%
-40%
FY07
FY08
FY09
FY10
% change in volume of MHCV of Tata Motors
% change in RKFL's sales to Tata motors
CRISIL EQUITIES | 6
The company has three manufacturing facilities; the two catering to the
automobile segment are located in Jamshedpur, in close proximity to Tata
Manufacturing facilities
Motors (distance ~20km) and its key raw material supplier Usha Martin. This
located less than 10 km
helps it reduce freight cost and transit time. This has also helped Tata Motors
away from Tata Motors
implement just-in-time approach for all the components supplied by RKFL.
Non-auto segment growing at a slow pace
RKFL has the capability to manufacture products for various industries including
automobile, railways and defence, but it has not been able to gain traction in
any of the sectors apart from auto. Indian Railways has been the primary
customer of the company after auto but the growth in the railways business has
been very slow. RKFL’s total sales grew at a CAGR of 34% during FY05 to FY10
Sales highly concentrated
but the sale from railways grew only 11%. This has reduced the contribution of
to auto manufacturers
sales from the railways to about 13% from 34%. With an expected increase in
sales from the ring rolling facility for the automobile sector, we expect
contribution from the non-auto sector to decline further to less than 10%.
Hence, we believe the company’s fortunes would remain highly dependent on
the growth prospects of the automotive industry.
Figure 8: Sales split in FY05
Defence 0.95%
Figure 9: Sales split in FY10
Defence 0.16%
Others 1.24%
Others 2.32%
Railway 13.14%
Railway 34.11%
Automobile 84.38%
Automobile 63.70%
Source: Company
Source: Company
Operates in a commoditised segment
In the auto forging industry, product design is primarily driven by OEMs and
forging companies concentrate on efficient manufacturing of the same. This
significantly lowers the bargaining power of the companies operating in this
space.
RKFL is no different from its peers in this regard. The company does not have
an in-house product design team to initiate product development for OEMs. The
company is supplied with a prototype of the product to be manufactured and
the design team at RKFL ensures that the product is built with minimal scrap
generation, reducing raw material costs.
CRISIL EQUITIES | 7
Strong bargaining power of OEMs may taper off in
short term
OEMs enjoy strong bargaining power with their suppliers and are known to
squeeze them. The demand for auto components has gone up in line with
Strong demand from auto
higher auto sales. However, because of bad times witnessed by the component
sector resulted in higher
manufacturers during the downturn there have been no major announcements
utilisation - 86% in H1FY11
of capacity addition by major players in the industry. In recent times, the auto
in the forging plant
industry has also complained about short supply of auto components. Strong
demand for auto has resulted in RKFL operating at capacity utilisation levels of
85-88%. With the increase in utilisation levels and strong order flows, the
company along with the industry is enjoying better bargaining power with
OEMs. This is also displayed by the price hikes received by RKFL from its key
customer. However, we believe this is a short-term phenomenon as the players
expand capacity to cater to increasing demand.
CRISIL EQUITIES | 8
Key risks
Customer concentration risk
RKFL derives close to 48% of revenues from sales to Tata Motors which exposes
RKFL generates close to
it to customer concentration risk. Any adverse impact on the sales of Tata
48% of its revenues
Motors’ commercial vehicles will pose a significant downside to the company’s
from Tata Motors
sales. RKFL is focusing on expanding its revenues from exports which should
reduce the exposure to Tata Motors, but will still remain considerably high.
Cyclical nature of end-user industry
RKFL is highly dependent on the automobile industry, which accounts for close
to 84% of revenues. In the second half of FY09, sales of RKFL declined by
Automotive industry
~28% on y-o-y basis on account of 51% y-o-y drop in commercial vehicle
accounted for 84% of
volumes. The auto industry is highly susceptible to economic cycles, changes in
total sales in FY10
interest rate and fuel cost, and varying demand patterns. Change in economic
cycles and interest rate can hamper the consumers’ ability to spend or result in
postponement of consumption. Increase in fuel costs might lead to lower
profitability of the transporters which will hamper the sales of commercial
vehicles. These factors will have a negative impact on the sales of auto
manufacturers and will lead to lower demand for auto components.
CRISIL EQUITIES | 9
Financial Outlook
Revenues to grow at two-year CAGR of 24%
Consolidated revenues are expected to increase at a two-year CAGR of 24% to
Rs 4.4 bn by FY12. The growth is expected to be driven primarily by growth in
Revenues likely to grow at
the ring rolling segment (FY10-FY12 CAGR of 48%). The ring rolling segment
a two-year CAGR of 24%
contributed ~31% of total revenues in FY10, which is expected to increase to
to Rs 4.4 bn in FY12
about 45% in FY12. The growth in the ring rolling segment would be fuelled by
increase in exports with the revival of global automotive sales and addition of
new customers including Cyprus Industries of the US and EGI of Egypt.
Figure 10: Sales to grow at two-year CAGR of
Figure 11: … fuelled by growth in ring rolling
24%...
facility
(Rs mn)
5,000
(Rs mn)
38%
40%
4,500
32%
35%
4,000
30%
25%
3,500
25%
3,000
17%
2,500
2,000
1,500
100%
1,600
67%
1,400
1,200
800
15%
600
2,009
2,295
2,858
3,772
4,416
FY08
FY09
FY10
FY11E
FY12E
5%
200
Revenue
16%
16%
568
7%
28%
-10%
267
805
1,342
1,773
FY08
FY09
FY10
FY11E
Ring rolling revenue
FY12E
40%
20%
0%
-20%
Ring rolling - y-o-y change (RHS)
Forging - y-o-y change (RHS)
% Growth (RHS)
60%
32%
0
0%
0
80%
42%
1,000
20%
10%
120%
1,800
400
14%
1,000
500
112%
2,000
Higher exports to expand EBITDA margins
RKFL enjoyed EBITDA margins of ~20% in FY08 but it declined on account of
the increase in operating costs. In case of RKFL, any increase in raw material
cost is passed on but increase in other costs is borne by the company.
EBITDA margin to expand
Considering RKFL’s low bargaining power with its customers we believe the
by ~126 bps in FY11
company will not be in a situation to pass on higher costs to them. However, an
increase in exports will boost the margins as the company gets incentive of
about 6% on its exports. We expect exports to grow at a two-year CAGR of
133% fuelled by the revival in global auto sales and an increase in the number
of customers.
CRISIL EQUITIES | 10
Figure 12: EBITDA margins to expand on account of exports
(Rs mn)
1,000
19.6%
20%
900
800
19%
18.3%
700
17.6%
17.5%
18%
600
500
17%
16.4%
400
16%
300
200
100
395
193
204
160
FY08
FY09
FY10
EPS is expected to
increase to Rs 14.1 in
870
FY12
15%
0
14%
Exports
FY11E
FY12E
EBITDA margin (RHS)
PAT to grow at a two-year CAGR of 62%, EPS to
increase to Rs 14.1
RKFL’s adjusted PAT is expected to grow to Rs 287 mn in FY12 from Rs 109 mn
Strong bottom-line
in FY10, driven by strong growth in revenues and improvement in margins. EPS
growth led by focus on
is expected to increase to Rs 14.1 in FY12 from Rs 6.9 in FY10. Although, PAT is
exports from ring rolling
growing at a two year CAGR of 62%, EPS growth will taper off on account of
plant
expected conversion of 3.9 mn warrants at a price of Rs 107.5 per share.
Figure 13: Sales growth and margin expansion to increase EPS
(Rs)
16
200%
159%
14
150%
12
77%
10
100%
8
6
16%
50%
-7%
0%
4
2.7
-50%
2
8.5
0
FY08
-68%
FY09
6.9
12.2
14.1
FY10
FY11E
FY12E
-100%
EPS
% change
RKFL’s RoE has declined from 21% in FY07 to 10% in FY10 on account of lower
PAT margin and total asset turnover. We believe the company’s RoE will
Better utilisation of assets
increase to 15% in FY11 and 17% in FY12 on the back of an increase in total
to result in higher RoE
asset turnover on account of strong growth in revenues and better margins
arising from higher exports.
Figure 14: RoE to increase due to higher margin...
25%
12%
10%
10%
20%
Figure 15: ... and higher total asset turnover
25%
1.2
1.0
0.9
20%
0.8
6%
7%
15%
5%
1.0
0.8
0.8
0.8
15%
6%
4%
10%
8%
1.0
0.6
10%
4%
2%
5%
2%
21%
16%
4%
10%
15%
17%
FY07
FY08
FY09
FY10
FY11E
FY12E
0%
0%
ROE
PAT Margin (RHS)
0.4
5%
0.2
21%
16%
4%
10%
15%
17%
FY07
FY08
FY09
FY10
FY11E
FY12E
0%
0.0
ROE
Total asset turnover (RHS)
Management Overview
CRISIL's fundamental grading methodology includes a broad assessment of
management quality, apart from other key factors such as industry and
business prospects, and financial performance.
Experienced management
RKFL has a highly experienced management headed by Mr Mahabir Prasad
Jalan, chairman. He is a technocrat with more than two decades of experience
in forgings and has been the driving force behind the company’s success.
Starting his career from the shop floor, he eventually set up his own forging
company. The succession plan for Mr Mahabir Prasad Jalan is well in place as he
An experienced
is supported by his son Mr Naresh Jalan, managing director, who has been
management at
working with the company for the past 15 years. He has been instrumental in
the helm
transforming RKFL’s relationship with Tata Motors from being a tier-2 vendor to
a direct supplier.
Installed India’s first automated ring rolling plant
RKFL’s management has been quick in identifying new opportunities and does
not fear from investing in new technology. This plant has given the company a
competitive edge in the manufacturing of crown wheels which are used in the
differential of commercial vehicles.
Professional set-up and strong second line
RKFL’s promoters have adopted a professional approach towards managing the
company. The company has inducted various professionals from the industry at
the senior and mid-management levels to prepare for the next level of growth.
The promoters have also introduced an employee stock option plan (ESOP) for
the key management personnel to ensure their interest match with that of the
company. The management has been delivering results on a continuous basis,
which resulted in RKFL in receiving the “best supplier” status by Tata Motors for
2010.
Corporate Governance
CRISIL’s fundamental grading methodology includes a broad assessment of
corporate governance and management quality, apart from other key factors
such as industry and business prospects, and financial performance. In this
context,
CRISIL
Equities
analyses
the
shareholding
structure,
board
composition, typical board processes, disclosure standards and related-party
transactions. Any qualifications by regulators or auditors also serve as useful
inputs while assessing a company’s corporate governance.
Overall, corporate governance at RKFL meets the regulatory requirement
Corporate governance
supported by reasonably good board practices and an independent board.
practices meet the
regulatory requirement
Board composition
RKFL’s board consists of nine members, of whom six are non-executive and five
are independent directors, which is more than the requirement under Clause 49
of SEBI’s listing guidelines. The board is chaired by Mr Mahabir Prasad Jalan,
who is also a promoter of the company. The directors have strong industry
experience and are highly qualified. Given the background of directors, we
believe the board is experienced. The independent directors have a fairly good
understanding of the company’s business and its processes. The independent
directors on the board include:
•
Mr Satish Kumar Mehta, who has over 36 years of industrial experience in
forgings, machined crankshafts and non-traditional machine tools industry.
He has been the chairman of Technical Committee of Association of the
Indian Forging Industry for the past 20 years
•
Mr Surendra Mohan Lakhotia, a CA with diversified work experience in
companies including Hindalco and other Aditya Birla Group companies
•
Mr Padam Kumar Khaitan, an attorney of law with more than 37 years of
experience in legal matters
•
Mr Ramprasad Saraf, who has 11 years of experience in the steel industry
•
Mr Laxminarayan Jhavar, who has been associated with numerous
companies including Hindustan Motors Ltd and Jayaswal NECO Ltd.
Board’s processes
The company’s quality of disclosure can be considered good judged by the level
of information and details furnished in the annual report, websites and other
publicly available data. The company has all the necessary committees – audit,
remuneration, nomination, and investor grievance - in place to support
corporate governance practices. The audit committee consists of four nonexecutive members and is chaired by an independent director, Mr Surendra
Mohan Lakhotia.
Valuation
Grade: 5/5
Considering the cyclical nature of the industry, we have used the price-toearnings ratio (PER) method to value RKFL. We have assigned a PER of 11x to
We assign a fair value of
the company due to strong growth mainly in the ring rolling segment. Based on
Rs 155 per share to RKFL
the FY12 EPS of Rs 14.1, our fair value estimate for the business is Rs 155 per
and initiate coverage with
share.
a valuation grade of
“5/5”
The stock is currently trading at Rs 112 per share (30th December 2010).
Consequently, we initiate coverage on RKFL with a valuation grade of ‘5/5’,
indicating that the current market price has ‘strong upside’.
One-year forward P/E band
One-year forward EV/EBITDA band
(Rs mn)
(Rs)
300
8000
7000
250
6000
200
5000
150
4000
3000
100
2000
50
1000
5x
8x
RKFL
17x
6x
8x
P/E – premium / discount to NIFTY
P/E movement
Jul-10
Oct-10
Jan-10
Apr-10
Jul-09
Oct-09
Jan-09
Apr-09
Jul-08
4x
Oct-08
Jan-08
Apr-08
Jul-07
Oct-07
Jan-07
Apr-07
Oct-06
Apr-06
Jul-10
14x
Oct-10
Apr-10
Jan-10
Jul-09
11x
Oct-09
Apr-09
Jan-09
Jul-08
Oct-08
Apr-08
Jan-08
Jul-07
Oct-07
Apr-07
Jan-07
Jul-06
Oct-06
Apr-06
RKFL
Jul-06
0
0
10x
100.0
300%
250%
80.0
200%
150%
60.0
100%
+1 std dev
40.0
50%
0%
20.0
-50%
Jul-10
Oct-10
Apr-10
Jul-09
Oct-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Jul-07
1yr Fwd PE (x)
Median premium/discount to NIFTY
Oct-07
Apr-07
Jan-07
Jul-06
Oct-06
Apr-06
Oct-10
Jul-10
Jan-10
Apr-10
Oct-09
Jul-09
Jan-09
Apr-09
Oct-08
Jul-08
Jan-08
Apr-08
Jul-07
Oct-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
Premium/Discount to NIFTY
-20.0
Jan-10
-1 std dev
0.0
-100%
Median PE
Peer comparison
EBITDA Margin (%)
Price/Earnings (x)
(Rs mn)
FY08
FY09
FY10
FY08
FY09
RK Forgings Ltd
1,840
19.6
17.5
16.4
13.2
41.8
16.2
1.9
1.8
1.5
M.M. Forgings Ltd
1,533
22.6
18.9
18.3
5.5
14.5
14.2
0.9
0.5
1.4
Mahindra Forgings Ltd
7,785
16.2
4.2
15.9
nm
nm
nm
0.8
0.9
Companies
M.cap
Kalyani Forge Ltd
Price/Book (x)
FY10 FY08 FY09 FY10
RoE (%)
FY08
FY09
FY10
16.0
4.4
10.3
18.4
11.7
10.7
0.9
(4.0)
(4.9) (12.9)
626
13.8
5.6
11.0
6.1
22.2
26.4
0.9
0.9
1.2
13.5
(3.1)
2.3
Ahmednagar Forgings Ltd
5,763
19.5
21.4
22.9
4.9
4.8
6.1
1.3
1.2
1.2
17.8
7.9
nm
JMT Auto
1,310
16.9
22.3
21.9
7.7
8.5
24.0
0.3
0.3
0.9
9.4
3.3
1.4
Sou rce: CR ISIL Equ it ies
Company Overview
Kolkata-based
Ramkrishna
Forgings
Ltd
(RKFL)
primarily
manufactures
precision engineering components for automobile, railways and other sectors.
The company was founded in 1981 and got listed on the NSE and the BSE in
2004. It has three manufacturing units - two in Jamshedpur, Jharkhand and
one in Howrah, West Bengal. RKFL’s facilities are integrated with in-house die
making capabilities.
The company has a large product portfolio catering to the demand of various
sectors including automobiles, railways, mining, general engineering and
defence.
Table 2: Product snapshot
End-user industry
Automobiles
Products
Gears, shafts, wheel mount, tripods, forged arms,
connection rods, levers
Railways
Screw couplings, draw gear assembly, snubber assembly,
hanger, block hanger, side frame key , lower spring seats
and various other forgings items of railway coaches and
wagon
Defence
Defence equipment
Figure 16 : End-user-wise revenue contribution
100%
2%
4%
90%
80%
4%
19%
34%
3%
4%
2%
13%
12%
13%
85%
83%
84%
FY09
FY10
34%
70%
60%
50%
40%
30%
77%
64%
63%
FY05
FY06
20%
10%
0%
Automobile
FY07
Railway
FY08
Defence and Others
Business segments
Forging, machining and heat treatment - Under forging, steel billets are
used as a raw material and through hammers and upsetters, the company
manufactures products of different shape and sizes depending on the end use.
Forged products are then processed in the machining capacity, which makes the
product suitable for use as a finished component in the automobile industry.
Some products are further processed in the heat treatment facility to improve
the mechanical and physical properties.
Ring rolling – It is a cost-effective and efficient production process for the
production of ring-shaped components like crown wheels and bearing rings.
Through its ring rolling facility, the company caters to the demand for crown
wheels, a critical component for automobile's transmission system. RKFL’s ring
rolling facility is fully automated ensuring consistent quality of the end products.
Table 3: Details of installed capacities and utilisation rate
Segment
Installed capacity (MT)
Capacity utilisation rate
2009
2010
2009
2010
Hammer forging
34,100
34,100
54%
78%
Ring rolling
24,000
24,000
24%
40%
Key customers
In the domestic market, RKFL supplies auto components to all major
commercial vehicle manufacturers such as Tata Motors, Hindustan Motors,
Ashok Leyland and Eicher Motors. Internationally, the company’s key client is
Arvin Meritor.
The company is in the approved panel of Research Design and Standards
Organisation (RDSO) for supplies to the Indian Railways, which accounted for
close to 13% of RKFL’s total sales in FY10.
Key milestones
Year
Milestones
1981
Ramkrishna Forgings was founded
1995
Became a limited company
2000
Became an ISO 9002 approved unit
2006
Successful extension from forging to machining
2007
Heat treatment facility commissioned
2008
Commencement of ring rolling facility
2010
Best supplier award from Tata Motors
Annexure: Financials
Income statement
(Rs mn)
Operating income
EBITDA
EBITDA margin
Balance Sheet
FY08
2,009
Interest
2,295
FY10
2,858
FY11E
FY12E
(Rs mn)
3,772
4,416
Liabilities
393
401
467
665
809
19.6%
17.5%
16.4%
17.6%
18.3%
Depreciation
EBIT
FY09
96
111
131
187
195
296
290
336
477
614
107
236
177
188
197
189
54
159
289
416
Other income
10
15
Exceptional inc/(exp)
(0)
Operating PBT
PBT
200
Tax provision
Minority interest
PAT (Reported)
Less: Exceptionals
Adjusted PAT
70
-
73
28
-
130
45
(0)
130
9
4
4
41
(5)
12
14
-
-
163
301
430
54
100
143
-
-
-
109
201
287
-
-
201
287
(5)
114
FY08
FY09
Equity share capital
153
153
164
164
203
Reserves
749
794
1,102
1,264
1,770
Minorities
Net worth
C onvertible debt
FY10
FY11E
FY12E
-
-
-
-
-
902
948
1,266
1,428
1,974
-
-
-
-
-
Other debt
1,518
1,934
1,883
2,183
2,083
Total debt
1,518
1,934
1,883
2,183
2,083
145
172
225
225
225
2,565
3,054
3,374
3,836
4,282
1,589
1,724
1,819
1,731
1,636
85
216
260
260
260
1,673
1,941
2,079
1,991
1,896
58
3
0
0
0
Inventory
855
830
995
1,173
1,373
Sundry debtors
352
422
453
672
786
Loans and advances
187
171
268
339
397
12
98
6
205
462
-
-
-
1,723
2,390
3,019
Deferred tax liability (net)
Total liabilities
Assets
Net fixed assets
C apital WIP
Total fixed assets
Investments
Current assets
Ratios
FY08
FY09
FY10
FY11E
FY12E
Growth
Operating income (%)
38.0
14.3
2.0
24.5
32.0
17.1
C ash & bank balance
EBITDA (%)
38.3
16.7
42.2
21.8
Marketable securities
Adj PAT (%)
(6.5)
(68.3)
177.2
76.7
43.0
Total current assets
Adj EPS (%)
(7.3)
(68.3)
158.7
76.7
15.5
Total current liabilities
587
434
427
545
632
Net current assets
833
1,110
1,296
1,845
2,386
Intangibles/Misc. expenditu
Profitability
EBITDA margin (%)
Adj PAT Margin (%)
19.6
17.5
16.4
17.6
18.3
Total assets
6.5
1.8
4.0
5.3
6.5
RoE (%)
16.0
4.4
10.3
14.9
16.9
Cash flow
RoC E (%)
15.2
10.9
11.1
14.1
16.0
(Rs Mn)
RoIC (%)
13.1
11.4
10.1
12.2
14.2
Pre-tax profit
Total tax paid
Valuations
Price-earnings (x)
Depreciation
13
23
1,420
1,544
-
-
-
-
-
2,565
3,054
3,374
3,836
4,282
FY11E
FY12E
FY08
200
96
41.8
16.2
9.2
7.9
Working capital changes
(175)
Price-book (x)
1.9
1.8
1.5
1.3
1.2
Net cash from operations
120
EV/EBITDA (x)
8.2
8.8
8.0
5.7
4.8
Cash from investments
EV/Sales (x)
Dividend yield (%)
1.4
1.1
1.0
13.8
1.8
-
1.8
17.6
16.7
16.7
1.0
-
1.0
1.8
2.1
C apital expenditure
Investments and others
Net cash from investments
69
(1)
13.2
Dividend payout ratio (%)
FY09
(891)
(70)
(962)
(1)
FY10
168
(1)
301
430
(100)
(143)
111
131
187
195
(181)
(300)
(350)
(285)
(3)
(2)
38
198
(378)
(269)
(100)
(100)
46
(332)
25
(244)
-
-
(100)
(100)
Cash from financing
B/S ratios
Equity raised/(repaid)
-
118
-
Debt raised/(repaid)
759
417
(51)
300
62
Dividend (incl. tax)
(18)
-
(19)
(34)
(48)
67
Others (incl extraordinaries)
(6)
(113)
Inventory days
204
169
159
144
145
C reditors days
128
83
62
62
62
69
59
66
Working capital days
131
143
146
142
147
Net cash from financing
Gross asset turnover (x)
1.5
1.2
1.3
1.6
1.8
C hange in cash positon
Net asset turnover (x)
1.7
1.4
1.6
2.1
2.6
C losing cash
Sales/operating assets (x)
1.6
1.3
1.4
1.9
2.3
C urrent ratio (x)
2.4
3.6
4.0
4.4
4.8
Quarterly financials
Debt-equity (x)
1.7
2.0
1.5
1.5
1.1
(Rs mn)
Net debt/equity (x)
1.7
1.9
1.5
1.4
0.8
Net sales
Interest coverage
2.8
1.2
1.9
2.5
3.1
C hange (q-o-q)
Debtor days
EBITDA
Per share
C hange (q-o-q)
FY08
Adj EPS (Rs)
FY09
FY10
FY11E
FY12E
EBITDA margin
8.5
2.7
6.9
12.2
14.1
PAT
C EPS
14.7
9.9
14.9
23.6
23.8
Adj PAT
Book value
58.9
61.8
77.1
86.9
97.1
1.2
2.0
2.4
16.4
16.4
20.3
Dividend (Rs)
Actual o/s shares (mn)
1.2
15.3
15.3
C hange (q-o-q)
Adj PAT margin
Adj EPS
15
54
4
106
810
421
154
(31)
86
12
98
(92)
6
419
(100)
261
158
199
256
205
462
Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11
709
NA
106
804
13%
127
831
3%
124
772
1,002
-7%
30%
124
176
NA
19%
-3%
0%
42%
15.0%
15.8%
14.9%
16.1%
17.5%
25
38
38
32
52
25
38
38
32
52
NA
50%
1%
-17%
63%
3.6%
4.7%
4.6%
4.1%
5.2%
1.7
2.5
2.3
1.9
3.2
Sou rce: CR ISIL Equ it ies
Focus Charts
Forging – capacity utilisation to increase on the
Ring rolling– capacity utilisation to increase on
back of growth in MHCV sales
back of export sales
(MT)
(MT)
35,000
87%
80%
30,349
24,321
18,526
32.7%
21.4%
10,000
-0.3%
20%
10,000
7,500
2,500
-40%
FY09
FY10
FY11E
Production (MT)
70%
60%
50%
40%
40%
19,680
24%
15,120
5,000
0
FY08
80%
63%
15,000
12,500
-20%
90%
20,000
40%
0%
11.2%
-32.8%
82%
22,500
17,500
60%
26,487
15,000
5,000
29,667
54%
25,000
20,000
100%
78%
71%
30,000
89%
30%
20%
9,700
5,643
10%
0%
0
FY12E
FY09
FY10
FY11E
Production (MT)
Utilisation (RHS)
FY12E
Utilisation (RHS)
Sales to Tata Motors increased even in downturn
Contribution from exports to increase margins
(Rs mn)
124%
140%
1,000
120%
19.6%
20%
900
100%
700
55%
47%
60%
35%
8%
20%
500
-40%
FY08
870
16%
200
100
FY07
17%
16.4%
300
-31%
-20%
18%
400
-4%
0%
17.6%
17.5%
600
35%
40%
FY09
FY10
395
193
204
160
FY08
FY09
FY10
15%
14%
0
% change in volume of MHCV of Tata Motors
Exports
% change in RKFL's sales to Tata motors
FY11E
FY12E
EBITDA margin (RHS)
EPS and EPS growth
Shareholding pattern over the quarters
(Rs)
100%
16
200%
159%
14
150%
12
8
100%
16%
50%
0%
2.7
-50%
-68%
8.5
6.9
12.2
14.1
-100%
0
FY08
FY09
FY10
EPS
FY11E
FY12E
% change (RHS)
22%
21%
24%
24%
2%
1%
52%
54%
Sep-09
Dec-09
25%
25%
26%
22%
22%
22%
2%
2%
1%
51%
51%
51%
80%
60%
50%
40%
-7%
4
2
90%
70%
77%
10
6
19%
18.3%
800
80%
30%
20%
10%
0%
Promoter
Mar-10
FII
DII
Jun-10
Sep-10
Others
CRISIL Independent Equity Research Team
Mukesh Agarwal
Director
+91 (22) 3342 3035
[email protected]
Tarun Bhatia
Director, Capital Markets
+91 (22) 3342 3226
[email protected]
Chetan Majithia
Head, Equities
+91 (22) 3342 4148
[email protected]
Sudhir Nair
Head, Equities
+91 (22) 3342 3526
[email protected]
Nagarajan Narasimhan
Director, Research
+91 (22) 3342 3536
[email protected]
Ajay D'Souza
Head, Research
+91 (22) 3342 3567
[email protected]
Manoj Mohta
Head, Research
+91 (22) 3342 3554
[email protected]
Sachin Mathur
Head, Research
+91 (22) 3342 3541
[email protected]
Sridhar C
Head, Research
+91 (22) 3342 3546
[email protected]
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Ramkrishna Forgings Ltd

Transcription

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